July 30, 2010

Battle of the Academic Models

By Cindy Ivanac-Lillig

Just in time for the beginning of the fall semester, there is a trickle of academic data and analysis on the unprecedented fiscal and financial market interventions over the past two years. There are a number of blogs buzzing today with Mark Zandi's report on the effect of these unprecedented interventions. He, along with Alan Blinder, try to show what economist affectionately refer to as the "counter factual” -- what would have happened if the steps from the government, the Treasury and the Fed were not taken.

In short, their model shows that the financial market intervention by the government and the Fed was very beneficial. Without the intervention, they conclude that there would have been approximately 5 million additional people out of work in 2010 (a 12.7% unemployment rate). However, they are not without their critics. John Taylor has a blog entry discounting this research.

The recession may have ended, but the academics are just getting warmed up. What do you think?

July 14, 2010

Cart Before the Horse: Financial Literacy and Math

By Cindy Ivanac-Lillig

I wrote a blog this past December which generated some debate, "Financial Honesty not Literacy in the New Year." My basic point was that being financially literate alone does not automatically improve your financial decision making abilities. I have written other blog entries on how we aren't necessarily good at long-term cost/benefit analyses as well which complicates our decision making abilities. These blog entries were trying to communicate that knowing how to do something does not necessarily make you better at it.

A colleague forwarded me a New Yorker article this week that touched on this topic (and made me laugh). The article, Greater Fools, states that based on a recent Fed survey, folks who were confident in their financial decision making ability made incorrect choices almost half of the time. The author concludes that if financial literacy training does nothing but point out to people what they don't know, it would be doing a good service.

I disagree. I think that the underlying survey from the Fed shows that we need to find a way to teach arithmetic! The study showed that folks who scored in the bottom quartile on a basic calculation test had 4X more foreclosures among them. Decision making is an important skill. I believe that teaching people about how the economy works is fundamental to their ability to develop this skill. However, decision making skills and financial literacy probably need to take a back seat to adding, subtracting, and multiplying.